CalPERS funding level: How low can it go?

As CalPERS puts a new focus on risk, a funding level that drops to 40 percent is emerging as the red line.

The worry is that if the funding level of the big pension fund drops too far, it may not be practical to raise annual employer payments enough to regain proper funding.

The rough estimate (final figures are not in yet) is that CalPERS funding as of last June averaged 74 percent, up from 65 percent the previous year. A spokesman said the average level has never fallen below 55 percent.

But CalPERS wants some cushion in case the economy slides back into a major recession, punching another big hole in investment earnings expected to provide about two-thirds of pension revenue.

Board member Henry Jones, the new CalPERS investment committee chairman, said last week the nation’s largest public pension fund has the dual task of respecting the employer’s financial situation as well as the “fiduciary” duty to protect pensions.

“If you dig a hole so deep, as Mr. (board member Dan) Dunmoyer said, you could find institutions going into bankruptcy,” he said, “and we have been provided with a chart which shows that if your funding drops to 40 percent you probably can’t survive.”

Jones was explaining why he voted with all but one of the other board members to lower the CalPERS earning forecast from 7.75 to 7.5 percent, raising the annual payments to CalPERS from state and local governments struggling with deep budget cuts.

Dropping to 40 percent of the projected assets (employer-employee contributions and investment earnings) needed to pay pensions promised in the decades ahead would probably not be literally fatal to the California Public Employees Retirement System.

But some recent board reports have charts showing that funding levels would enter a “warning track” (see investment roadmap, p. 15) if they were to drop to 40 percent or below due to big losses during another deep economic recession.

The chief investment officer, Joe Dear, and the chief actuary, Alan Milligan, are trying to understand what might happen if there is another sharp “drawdown” of the pension fund, valued at $237 billion this week.

“I’m quite confident of our ability to achieve a long-term target rate of return,” Dear told the board last week. “I’m more concerned about the risk we have in the portfolio with respect to drawdown.”

At a January workshop, said Dear, the board went through a preliminary exercise showing under what conditions the funding level could drop below 40 percent if a deep recession resulted in investment losses of 20 percent.

“Alan Milligan and I will be bringing a report to you at the end of June and expect, with your agreement, to spend some time at the July off-site (board meeting) on this topic,” Dear said.

Milligan said theoretical work on this type of risk has been done by an actuary, Bill Hallmark, who uses the term pension event horizon for the point at which an employer cannot sustain the payments needed to pay off pension debt in a given period.

CalPERS began a new focus on risk after huge losses during the recession, when the investment fund plunged from a peak of $260 billion in the fall of 2007 to a bottom of $160 billion in March 2009.

In addition to developing a risk-based framework for investments, CalPERS also has begun giving the 1,573 government agencies in the system a five-year analysis showing how rates go up if investment earnings are below the target, now 7.5 percent.

CalPERS has been criticized for telling legislators investment earnings would pay for a major trendsetting state pension increase, SB 400 in 1999, even though its actuaries had accurately forecast how rates could soar if earnings fell below the target.

This month CalPERS began making more information public through its website. Board meetings are now being webcast and archived, actuarial reports for 2,043 separate retirement plans posted, and Public Records Act requests listed and summarized.

“We are committed to be an honest broker of information, especially as we discuss the future of pensions in our state,” Anne Stausboll, CalPERS chief executive officer said in a news release.

This month the board also was given the first “Annual Review of Funding Levels and Risks,” a report on “overall pension soundness and sustainability” resulting from a governance project that restructured some of the board committees.

The new report that monitors five “key measures” said, among other things, that CalPERS had “negative cash flow” last fiscal year, paying out $2.7 billion more in benefits than received in employer-employee contributions.

In most years a funding gap of that size seems easily closed by earnings from a $237 billion investment portfolio. But CalPERS finances are based on actuarial projections of costs and revenue that go decades into the future.

What CalPERS watches in its 2,044 separate plans is whether negative cash flow is preventing “adequate progress” toward reaching full funding. The board adopted a policy two years ago that can trigger a rate increase in two ways:

“If in 30 years, 1) a plan’s funded status is not projected to improve by 15 percent or 2) a funded status of 75 percent is not projected,” the report said.

CalPERS critics point to the massive “unfunded liability.” But that debt (which balloons with a lower earnings forecast said by critics to be more realistic) is based on the additional money needed to reach 100 percent funding, usually after 30 years.

Under the CalPERS policy a projected 30-year funding level of 75 percent is acceptable. The report said plans can be “behind schedule” and “do not necessarily have to be fully funded at all times.”

Investment gains and losses are amortized over a “rolling” 30-year period. The actuarial view is that over time gains and losses will offset each other, but the balance can change quickly and is rarely even for any length of time.

On the other hand, an increase in pension benefits or a change in the earnings forecast that “discounts” future pension obligations is amortized over a 20-year period because there is no offset for the cost.

Critics argue that the failure to fully fund pensions passes the debt to future generations, forcing them to pay for services received by the current generation. But any CalPERS “intergenerational transfer” of debt is likely dwarfed by retiree health costs.

With some new and small exceptions, no money has been set aside to earn interest and pay for retiree health care promised state workers. It’s one of the fastest-growing state budget costs, about $1.7 billion next fiscal year.

Two decades ago legislation by former Assemblyman Dave Elder, D-Long Beach, created a retiree health care fund, but it received no money. Now state Controller John Chiang estimates the state owes $62 billion for retiree health care promised current state workers over the next 30 years.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 22 Mar 12

23 Responses to “CalPERS funding level: How low can it go?”

  1. Ted Steele, Poodle fixer Says:

    First of all Fellas— Can’t some of you posters get up a bit earlier in the am? Do I always have to be the first one posting on these new “stories”?

    OK– here it is— the so called “negative cash flow” is nonsense. The system is as cash positive as can be. The fact that the fund pays out some years is of course why we have the fund which pays 2/3 of the pensions.

    Trolls— please discuss…

  2. Tough Love Says:

    Quoting …”But some recent board reports have charts showing that funding levels would enter a “warning track” (see investment roadmap, p. 15) if they were to drop to 40 percent or below due to big losses during another deep economic recession.”

    That pretty funny ….. while a 40% funding level (measured no doubt on a very liberal basis using “smoothed”, not “market value” of assets, and discounting Plan liabilities at the earnings rate assumed for assets, rather than the much lower appropriate rate) means you enter a “warning” track, ……….. under the US Gov’ts rules applicable the Private Sector Plans, restrictions begin when the funding level drops to 80%, and the Plan is FROZEN (Zero future growth) when the funding level drops to 60%.

    CalPERS is already near dead … but the workers would freak if told the truth.

  3. Tough Love Says:

    Quoting …”Under the CalPERS policy a projected 30-year funding level of 75 percent is acceptable. The report said plans can be “behind schedule” and “do not necessarily have to be fully funded at all times.””

    While that may be CalPERS (desperate) policy, I doubt if they could find a professional pension actuary (not paid-off to do so) to opine that that policy is either appropriate or reasonable.

    Suggestion …. have CalPERS ask the American Academy of Actuaries (the umbrella orianizaion for professional actuaries in the US) to Opine on reasonableness of that policy. As a public service, I’m quite certain they wwould do so (w/o any fees).

  4. Tough Love Says:

    Quoting …”Critics argue that the failure to fully fund pensions passes the debt to future generations, forcing them to pay for services received by the current generation. But any CalPERS “intergenerational transfer” of debt is likely dwarfed by retiree health costs. ”

    The latter situation (huge unfunded retiree healthcare) is horribly unfair in and of itself. So because THAT is far worse, it’s supposed to OK or justify the inter-generational transfer for pension promises and the funding thereof?

    Does anyone (other than those not riding this gravy train) not see the twisted logic ?

  5. Ted Steele,-- it's so cozy up here in poodle's tiny head! Says:

    What healthcare gravy train?? I pay $1150 a month for my Cigna policy—- have a nice day! Gravy train– lmao!

  6. Al Moncrief Says:

    THE COLORADO WE LIVE IN.

    Fact #1: Governor Hickenlooper signs a bill to give a raise to state legislators. Fact #2: State legislators steal contracted, earned, fully-vested, and accrued retirement benefits from elderly in our state (SB 10-001, COLA theft bill.)

    Our values are warped.

    The theft of retirement benefits in Colorado was championed by the pension (Colorado PERA) itself and supported by a coalition of public sector unions. Colorado PERA led a parade across Colorado in an effort to persuade fully-vested PERA retirees to voluntarily relinquish their retirement benefits. After frightening a fraction of PERA retirees into supporting the COLA theft bill, SB 10-001, the PERA administrators deemed their support license to steal fully-vested benefits from ALL PERA retirees. They then went on to advocate for enactment of SB 10-001 before the Colorado General Assembly. I have read accounts that the number of lobbyists hired by Colorado PERA to support the COLA theft bill ranged between 12 and 20. PERA orchestrated a coalition in Colorado to ram the bill through the process in spite of a Colorado attorney general’s opinion stating that the bill was unconstitutional, contravening Colorado case law, and a statement from Colorado PERA’s General Counsel in a 2008 Denver Post article that taking the COLA benefit from fully-vested retirees was likely illegal. For some reason he had a change of heart, and testified in favor of the COLA theft bill in 2010. What happened in Colorado was, in my opinion, a crime.

    Thank God the courts are beginning to correct the outright, unabashed theft of public pension benefits that has occurred in a number of states across the U.S. Read below the clarity that this Florida judge brings to the matter, it is truly breathtaking.

    COLA LAWSUIT VICTORY IN FLORIDA! – FLORIDA JUDGE: IT’S ILLEGAL TO TAKE EVEN FUTURE COLA ACCRUALS FROM EMPLOYEES, LET ALONE COLA BENEFITS THAT HAVE ALREADY BEEN EARNED AND ACCRUED (SEE: COLORADO GENERAL ASSEMBLY, SB1.)

    The Florida Legislature attempted pension reforms that were not nearly as aggressive, in terms of risk of unconstitutionality, as those adopted by the Colorado General Assembly. Nevertheless, the Florida Legislature has been smacked down by the courts.

    Here are some noteworthy portions of the Florida ruling:

    “This court cannot set aside its constitutional obligations because a budget crisis exists in the state of Florida. To do so would be in direct contravention of this court’s oath to follow the law.”
    “To find otherwise would mean that a contract with our state government has no meaning.”
    “There was certainly a lawful means by which they could have achieved the same result.”
    “Florida law is clear that a legislature can, as part of its power to contract, authorize a contract that grants vested rights which a future legislature cannot impair.”
    “The elimination of the future COLA adjustment alone will result in a 4 to 24% reduction in the plaintiffs total retirement income. These costs are substantial as a matter of law.”
    “Where the state violates its own contract, complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the state’s self-interest is at stake.”
    “All indications are that the Florida Legislature chose to effectuate the challenged provisions of SB 2100 in order to make funds available for other purposes.”
    “If a state could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all.”
    “The Takings Clause is intended to prevent the government from forcing some people alone to bear public burdens, which in all fairness and justice should be borne by the public as a whole.”
    “Defendants are further ordered to reimburse with interest the funds deducted or withheld . . . from the compensation or cost-of-living adjustments of employees who were members of the FRS prior to July 1, 2011.”

    Here’s a link to the decision in Florida:

    http://judicial.clerk.leon.fl.us/image_orders.asp?caseid=49809133&jiscaseid=&defseq=&chargeseq=&dktid=87117441&dktsource=CRTV

    Here’s hoping that one day Justus will prevail in Colorado. Read all about it and support the lawsuit at saveperacola.com.

  7. Drewsky Says:

    I’ve always felt that employer/ employee contributions should be 50/50, which would probably have mitigated the situation we have now as well as anything else. It would be expensive for employees, but anything worth having is worth paying for. As for health care, if the retirement age is raised (which I believe it will, along with the other reforms, in the not-too-distant future) Medicare would kick in about at the same time people retire, give or take a few years. As a taxpayer, I feel there are a number of things that are ‘horribly unfair’. For example, I don’t like paying for Three Strikes, the War on Drugs, Prison construction, Unwarranted Military Wars (Iraq, Afghanistan and whatever new ‘adventure’ awaits us), Domestic Spying, U.C. Davis’ Pepper Spray Bills and a host of other negative ill-conceived ventures. I see compensation/ benefits for the working middle class as a positive thing and don’t mind doing my bit, compared to all of the negative things I’m forced to pay taxes for. Is pension reform needed ? Sure, of course. All qualified actuarial sources agree on this. However, amateur financiers & wannabe plutocrats, who ‘have it in’ for public employees, are not offering any constructive answers.

  8. Captain Says:

    Tough Love Says: “Quoting …”Critics argue that the failure to fully fund pensions passes the debt to future generations, forcing them to pay for services received by the current generation. But any CalPERS “intergenerational transfer” of debt is likely dwarfed by retiree health costs. ”

    The latter situation (huge unfunded retiree healthcare) is horribly unfair in and of itself. So because THAT is far worse, it’s supposed to OK or justify the inter-generational transfer for pension promises and the funding thereof?

    Does anyone (other than those not riding this gravy train) not see the twisted logic ?”

    I do!

  9. Tough Love Says:

    Ted Steele, If you are a retiree under age 65 (pre-Medicare) with family coverage for 2 adults, the full cost of the likely benefits provided under your Cigna policy (i.e., the true average claim costs for that coverage) is likely $30K-$40K annually, noting that older people have MUCH higher claim costs on average than younger people (especially employed younger people)

    If you are being charged $1150/mo. ($13.8K annually), your former employer is providing a subsidy of roughly 60%. As a comparison, Private Sector workers very RARELY get ANY retiree healthcare subsidy any longer.

    So while you may not be happy paying that $1,150/mo., and envious of other Public Sector workers paying less (or nothing) for similar coverage, I guarantee that a lot of Private Sector pre-age 65 (Medicare-eligible) retirees would be thrilled to switch places with you..

  10. SeeSaw Says:

    Everytime somebody tries to make a point, TL, you accuse them of being envious of someone else at the same time. You accuse me of throwing out the facts concerning my spouse’s tiny private sector pension as complaining. I do think that facts are what should be stated–using opinions to spin the facts is a different matter. I pay $1195/mo to my former employer to cover the ABC premiums for coverage that is secondary to Medicare. What’s more, those premiums are higher than what ABC charges my employer for the active worker. It is true that older people have more claims–also true is the fact that the insurer pays only a tiny percentage of that cost, compared to what it pays for an active employee, that might have the same malady. You need to find another opinon to spin, when it comes to that healthcare gravy train.

    The idea that I and other public workers are responsible for the fact that we have DB pensions, and our counterparts in the private sector don’t, is ridiculous! Why don’t you take your facts and your talking points over to that sector where they belong.

    When it comes to learning the truth, the pensioners will get that truth from their respective pension providers–not TL.

  11. Tough Love Says:

    SeeSaw, The $1195/mo you pay to your former employer to cover the ABC premiums for coverage that is secondary to Medicare, is indeed not a low premium .

    Now envision having to pay that premium w/o the benefits of your much-richer-than-Private-Sector-pension. THAT’s the real world most live in …. and that you still do not seem to understand.

    And quoting …”The idea that I and other public workers are responsible for the fact that we have DB pensions, and our counterparts in the private sector don’t, is ridiculous! ”

    I never said you (or any other worker) is responsible for that. The collusion between your Unions and the politicians are the responsible parties that are the ones upon who, “blame” should be placed.

    But the workers (such as yourself) are the monetary beneficiaries of those excessive agreements, so THAT’s where Taxpayers need to go to fix it … by reducing those pensions, first for FUTURE service for actives, and then, if need be, by reducing pensions for those already retired.

    And FYI, CalPERS is hardly the place to go for transparency and truthfulness. If they were, SB400 would NEVER have been approved.

  12. Ted Steele,-- it's so cozy up here in poodle's tiny head! Says:

    Tough Lover—- LOL— your post is so typical of EVERY other post you make out here and the other troll places you haunt. Listen up— Once again you are dead wrong. Your cigna (I made up Cigna but my company is one you will know) numbers are off…well…..waaaaaaaaaaaaaaaaaaaay off. No one subsidizes my insurance. I wish they did– I do not qualify.

    I had a break in my gov. service after 30 years for a year. Therefore I pay it all myself. I would be VERY happy to meet you anytime/anywhere with my reciepts and bill stubs to prove it. I am serious about this offer. It might make you realize how full of it you usually are…although I doubt you’re big enough to admit a mistake.

    Get real.

  13. Tough Love Says:

    Ted, Your comments suggested …………..

    (a) you are a retiree,
    (b) I (reasonable) assumed the premium you quoted was for a couple
    (c) with the “Cadillac” cover typical of gov’t workers,
    (d) and VERY REASONABLY responded that (IF you were pre-age 65) , the premium ($1150/mo.) must be heavily subsidized.

    Everything above (and in my reply to you above) if right on the mark.

    If you want a better response, give fuller information.

    **********************

    As for me, (not you ?) being the Troll, all the reader needs to do is look at the variety of ridiculous posting handles you use.

  14. Ted Steele, American Says:

    That’s right TL—” er ah gee ah er I made assumptions”!!

    I am sure you make assumptuions in many of your talking point posts.

    The notion that my premium is “very heavily subsidized” is just the way you roll amigo— you assume much…and know little.

    Turns out here, like elsewhere, you are wrong.

    Is Ted Steele, American or poodle slayer any more of a rediculous handle than tough love? Are you still high?

  15. SeeSaw Says:

    I am subsidized by my former employer. The $16,000/yr I pay, out of pocket for the ABC insurance and Medicare premiums, for two over-age 65 adults, is 32% of my gross, pension amount–so subsidized or not, you sure can’t say I’m on any gravy train. And Anthem Blue Cross, is the real name of the insurance company..

  16. Captain Says:

    “Dropping to 40 percent of the projected assets (employer-employee contributions and investment earnings) needed to pay pensions promised in the decades ahead would probably not be literally fatal to the California Public Employees Retirement System.”

    But it would be fatal to many of the cities that are funding CalPERS. This is a ridiculous statement and I can’t help but wonder if CalPERS has considered the domino effect that will certainly occur if CalPERS assets drop to 40 percent. The scrutiny CalPERS is currently facing, as well as the damage CalPERS is currently inflicting on the state/counties/cities/special districts by continuing to lie & misrepresent, is unconscionable. If you, CalPERS management, think the current very justifiable scrutiny of your operation, political activism, union activism, and flawed policies are under attack I suggest you consider the future damage in terms of magnitudes of destruction and the ripple effect you’re potentially causing if assets drop to anything close to 40%. If CalPERS is able to survive, because 40% of assets will “probably not be literally fatal to the California Public Employees Retirement System”, can the same be said for the communities that have hired CalPERS to manage their pension plans? I don’t think so.

    CalPERS is failing to meet investment returns this current fiscal year. Actually they are losing money. If this should happen again in FY 2012-13 we are in huge trouble, assuming we aren’t already which is probably the case.

    To: CalPERS. Get the heck out of the way of Stockton and let them choose to include pensions in bankruptcy. The legal threats you sent Vallejo’s way are well documented; now they are facing a new structural deficit because your intimidation tactics, on behalf of the unions, scared them away from restructuring their pensions – even going forward. What business is it of yours, Mr. CalPERS, to advocate on the unions behalf when the unions have the means to fight their own fight? Aren’t you supposed to be managing fund money? When did it become O.K. for you to use taxpayer dollars to fight against taxpayers? I think you’ve taken great liberty with the wording of your charter and it needs to stop – NOW! Stay the Frick out of Stockton’s way, and quit designing policies that make it more difficult for cities to break-up with you. As an organization, quit claiming the high-ground until you can do so without being a corrupt hypocrite.

    Is a 40% funding ratio possible? Pension expert Girard miller has this to say about CalPERS:

    “How high will this flood crest? Local employers are now skeptical that they have been told the full truth about how high their pension costs will ultimately surge. Unlike the vast majority of public pension funds, CalPERS uses a 15-year actuarial smoothing process that camouflages the genuine economic impact of market fluctuations. I have no issue with normal industry-standard actuarial smoothing periods of 5 years, in light of the average length of a business cycle — which is 6 years based on 14 recession cycles in the past 84 years. But the CalPERS process is opaque and flunks the transparency test that taxpayers, public managers and municipal bond investors are entitled to expect. As I have explained before, such extraordinary “smoothing” practices deserve SEC investigation as an “artifice and device” to conceal relevant financial information from the investment community — as well as the employers who must now bear the financial brunt of unsustainable pension benefits.”

    If the recession ended in 2009, and the business cycle is 6 years, then CalPERS, even given two very good years followed by the current fiscal year bust, will be heading into another recession long before we pay for the current unfunded liabilities. Considering current average funding levels of 68%, pension payouts exceeding contributions by 3 billion, and the looming tsunami like growth in retiree health care costs (unfunded), we are facing a much leveraged “perfect storm”. And there is a very good chance we see 40% funding in CalPERS, or CalPERS pensions plus retiree medical.

    It probably isn’t even a question of “if “, but “when”.

  17. Ted Steele, American Says:

    pheeeeew— that was another long cut n paste I will never read!

    Have a nice weekend!

  18. Captain Says:

    Ted, other than the few sentences it is all original. I suspect you already know that but are just unsure how to respond. When you do get approval to respond I hope you do so. I’m looking forward to hearing the response of a paid advocate.

  19. Ted Steele, Director of Operations Says:

    oh God Cap as soon as I saw Miller’s name on the cut n paste I stopped reading it…..he is a one note samba like you pal. Sorry. Have a super weekend.

  20. Captain Says:

    “Ted Steele, Director of Operations Says:
    oh God Cap as soon as I saw Miller’s name on the cut n paste I stopped reading it…..he is a one note samba like you pal. Sorry. Have a super weekend.”

    No surprise that you find Girard Miller’s comments offensive; you find any rational well structured argument offensive. Maybe someday you can come up with one of your own – but I doubt it! Why don’t you ignore Mr. Millers argument and respond to my comments? Can you do that, teddie?

  21. Teddie Steele, Director of Operations Says:

    no. — It’s hard to see where your comments end and his start. And, I have responded to your same old rehash already a few times. What will be served by another comment? Can you answer that?

  22. Norman Silver Says:

    With the recently announced dispersion to share holders from Apple Cal PERS will be receiving a return on 2.7 million shares (one time) of over $2.50 per share. Another return from the Oil & Gas Assoc. will again be more than $2.00 a share on another 2.1 million shares. That should help to increase the Reserves some.

  23. spension Says:

    No unions involved in this pension dustup (that of executives at the University of California)… just good old conservative Regents, captains of private industry, who dealt some public funds pension sugar to their buddies in the higher levels of UC… vote for new taxes to keep these sorts of things solvent!

    http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2012/03/28/BAIU1NQCFS.DTL

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